Month: December 2017

I don’t know about anyone else, but I’m really struggling with the Labour Party’s approach to public expenditure.

I can understand that many people on the left of politics want to nationalise the railways, the utilities and the Post Office; and perhaps other business sectors as well. I don’t personally agree with doing so; but I understand and respect their arguments.

I understand that the political left is passionate about providing significantly increased funding for education, the NHS and the police. I understand that they want many more homes built, particularly local authority owned homes. I understand that they want to provide free university education for all. I understand that they want to improve support for the unemployed, for people with disabilities, for the homeless, for working people on low incomes and for lots of other very worthy causes. Not only do I understand all these ambitions, in principle I agree with them. However, they all have to be paid for. Nothing comes free. And this is where I struggle.

Between 1992 and 2007, the UK experienced it’s longest period of sustained economic growth, since the end of the second world war. Despite this, the governments of John Major (Tory), Tony Blair (Labour) and Gordon Brown (Labour) failed to achieve any form of fiscal surplus; in other words, we had no savings for a rainy day. Instead, we accumulated around £500 billions of debt.

In 2008, like many other countries, the UK was hit by the banking crisis. Irrespective of who was to blame – and we can argue about that until eternity – this was by far the biggest economic blow our country has had to face since the end of the second world war; and arguably the biggest economic blow in peacetime, for at least a century.

Gordon Brown’s Labour Government pumped money into the economy, using a range of economic levers, just to keep us afloat. Given the circumstances that existed at the time, it took the right decisions, acting quickly, decisively and effectively. To his credit, Gordon Brown also played an important role on the world stage, to encourage the governments of other countries, to take similar actions within their own economies. Without Brown’s intervention the outcome would have been far worse. But there was, and still is, a price to pay.

By 2010, our debt had doubled to £1 trillion, due to the huge additional borrowing that became necessary to offset the worst effects of the banking crisis. The budget deficit, which is the amount of additional borrowing incurred each year, grew from £41 billions in 2007/08 to £155 billions in 2009/10. This level of borrowing was unprecedented in peacetime.

Since then, the Cameron and May Governments have steadily reduced the annual budget deficit, which in 2017/18 will be around £58 billions. But because there has still been a substantial budget deficit each year, the national debt has continued to increase and is currently standing at around £1.8 trillions. Furthermore, it is likely to rise to around £1.9 trillions by 2020 and will continue to grow until well into the 2020s, because we will be incurring annual budget deficits, albeit on a reducing scale, for years to come. It doesn’t matter, which government is in power, the consequences of the 2008 crash will be felt by the people of this country for decades.

The size of the UK economy is measured by it’s gross domestic product (GDP), which is the value of the goods and services produced by all sectors of the economy in a year. It is currently around £2.0 trillions, which is only marginally more than the national debt. If we think about this at a domestic level, it’s like owning a house with a 90% mortgage, having no savings to fall back on, seeing every penny you earn gone by the end of each month and still needing to borrow more in order to fund your lifestyle. It’s completely unsustainable; and it’s no different for the UK economy.

Interest payments on our debt will be £49 billions in 2017/18. This is more than the entire defence budget of £44 billions and more than a third of the NHS budget of £144 billions. Interest rates have been at an all time low for the last few years; but there are now signs that they are starting to rise. We are, therefore, likely to see interest payments increase significantly over the next few years; partly because we are still increasing our debt and partly due to higher interest rates. And this is money we won’t have available, to invest in education, the NHS and all the other public services we need to improve.

There are only two ways to get ourselves out of this mess.

The first is to reduce public expenditure so that we start to make a budget surplus each year. We would then be able to start paying off our debt. But this would mean making substantial cuts to all our public services, which would be very painful for all of us. There is a widespread belief that we have already been enduring public expenditure cuts since 2010. In reality public expenditure has increased every year since 2010. However, it has not increased in line with either costs or demand. The funding of many services has, therefore, been cut. Public expenditure this year (2017/18) will be around £814 billions. Next year it will increase by around 1.7% to £828 billions. However, this increase will be less than inflation, thereby maintaining a squeeze on public services. But imagine if public expenditure was actually cut by £58 billions to eliminate the budget deficit. The impact would be catastrophic for our entire way of life and the widely used term of “Austerity” would take on a whole new meaning.

The second way to get out of this mess is to grow the economy. If we could increase the size of our economy at a faster rate than we increase our borrowing, the national debt would start to become a smaller percentage of our GDP. At the moment national debt is around 90% of GDP, which is crippling us. But as that percentage starts to reduce, our ability to fund our public services better, will start to increase.

The main source of government income, required to fund public services, is not borrowing but taxation. Public sector borrowing is the additional money required to fund public services, over and above that raised by taxation. So why not just increase taxation to plug the gap? Currently, additional taxation of the rich is a popular cry on the left of British politics. But without going into the argument about who should pay which taxes, the problem we face is that any form of additional taxation suppresses economic growth. That’s something we may not like but it’s a fact of life, with which we have to live. If the government was to substantially increase taxation, growth would be curtailed and, depending on how much additional taxation was called for, it could even result in the economy contracting and going into recession. Either way, it would increase the debt problem we already have rather than solve it.

Whichever government is in office, it has an incredibly difficult balancing act to perform. It has to grow the economy and maintain public services, without over taxing us and without incurring excessive debt. No government, since the second world war, has ever achieved a perfect balance. Labour governments have tended to over tax us and focus too much on public expenditure and not enough on controlling borrowing. Conservative governments have tended to do the opposite. But arguably, the relatively regular change of government between the two parties has maintained a reasonable balance, if viewed over the longer term. We are after all one of the wealthiest countries on the planet and, overall, the people of this country enjoy a higher standard of living than the overwhelming majority of people elsewhere in the world. Having made that last statement, I readily acknowledge that there is still an unacceptable level of people living in poverty and under privileged circumstances and, whilst their situations need to be tackled, they don’t represent the majority. Most UK citizens, alive today, enjoy a far higher standard of living than any previous generations.

The issue we face today with Labour under Jeremy Corbyn is altogether different from the political landscape that has dominated, since 1945. Corbyn has undoubtedly caught the imagination of a huge section of the electorate and, together with the Shadow Chancellor, John McDonnell, has led people to believe that the “Austerity Programme” since 2008, has been unnecessary and that massive increases in public expenditure are not only possible, but can be achieved, without increasing taxes on most people and in a way that will stimulate economic growth. They paint a hugely optimistic picture for their strategy; they condemn the current government as only interested in the rich; and they are positioning the rich as the scapegoats for all our problems.

Nothing could be further from the truth; and yet, within the foreseeable future, there is a real possibility of a Corbyn led government with John McDonnell as Chancellor of the Exchequer. For the reasons, I’ve outlined, the promises they are making are impossible to deliver. Despite their assurances to the contrary, there would need to be massive increases in taxation and borrowing to fund the huge public expenditure increase that would be needed. This would inevitably push the economy into recession, leading to savage cuts to public expenditure that would make the so-called austerity of today look like a golden era. It would hit the overwhelming majority of us; although, ironically, not the very rich, who would almost certainly invoke plans to protect their wealth by transferring it overseas. And that would, of course, add to our problems, as other countries, rather than us, would benefit from both their taxes and their spending.

If we once get into this downward spiral, it will take generations to recover.

Neither Jeremy Corbyn nor John McDonnell is stupid. It is inconceivable that they don’t understand the consequences of their economic policies; so why do they continue to promote them? The only conclusion I can come to, is that they are driven by a political ideology that seeks to replace our western, capitalist, democracy with a non-democratic, Marxist/Leninist, socialist state. And to achieve this, they are prepared to crash the economy on the basis that the end justifies the means.

I’m a firm believer in the democratic process and, if the British people genuinely believe that our nation would be better off under this type of socialist regime, those of us who take a different view will have to accede to the wishes of the majority. However, I doubt very much, if that is the case. I suspect that much of the support for Jeremy Corbyn is based on frustration with the time it is taking to recover from the banking crisis, the impact this is having on our public services and the fact that the continuing increase in our standard of living has stalled and possibly gone backwards.

People are becoming discontented; and the present government is doing nothing substantive to explain the challenges we face or to manage our expectations. On the other hand, Labour is now led by a rather comforting, grandfatherly figure telling us how it could all be different; something so many of us desperately want to believe. So, there is now a real risk that the United Kingdom will sleepwalk into a future that it will come to bitterly regret.